An interesting article popped up this week regarding the outstanding short positions on Silverado’s stock. The article was carried by PRNewswire-FirstCall referring to Buyins.net who said:

“From November 2005 to October 2007 approximately 1.9 billion total aggregate shares of SLGLF have traded for a total dollar value of nearly $184 million. The total aggregate number of shares shorted in this time period is approximately 143.4 million shares. The SLGLF SqueezeTrigger price of $0.099 is the volume weighted average short price of all short selling in SLGLF.

The first of several short squeezes is expected to begin when shares of SLGLF close above $0.08, where approximately 12 million shares have been shorted”

We are not experts on the practice of short selling shares but it appears to us that short selling involves the need to buy the stock at a later date in order to close the trade. So, sooner or later these short positions have to be closed out which should have a positive effect on the stock price.

If they are correct in their assessment then any rise in the stock price will put pressure on the shorters to close their positions. Yesterday Silverado closed at $0.08 having traded above this level during the session. It appears to us that this is a knife-edge situation where a rally will force closure of the short positions and put more upward pressure on the stock price.

If you are familiar with this sort of practice and can add more light to this situation please send us your comments so that all of our readers can benefit from your insights.

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Reader Comments (2)

Short selling involves loaning the stock to buy back at a later date Shorting stocks involves using borrowed money, otherwise known as margin trading. Just as when you go long on margin, it's easy for losses to get out of hand because you must meet the minimum maintenance requirement of 25%. If your account slips below this, you'll be subject to a margin call - you'll be forced to put in more cash or liquidate your position.

If a stock starts to rise and a large number of short sellers try to cover their positions at the same time, it can quickly drive up the price even further. This phenomenon is known as a short squeeze. Usually, news in the market will trigger a short squeeze, but sometimes traders who notice a large number of shorts in a stock will attempt to induce one. This is why it's not a good idea to short a stock with high short interest. A short squeeze is a great way to lose a lot of money extremely fast.

The final and largest complication is being right too soon. Even though a company is overvalued, it could conceivably take a while to come back down. In the meantime, you are vulnerable to interest, margin calls etc